MANAGING

INVENTORIES
 Learning Objectives
• Define the different types and roles of inventory in the
supply

• Differentiate costs of inventory

• Explain and compute measures of inventory

performance

• Describe how to conduct ABC inventory analysis

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 Warehouse
• A warehouse = a
place for storing
goods.

• Warehousing =
the act of storing 5
 Inventory
Items stocked by the company
• to support production.
• or meet customer demand.

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Inventory
Items stocked by the company
• to support production.
• or meet customer demand.

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Is there any inventory in Service?

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Is there any inventory in Service?

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 Types of Inventory

• https://www.youtube.com/
watch?v=TU2OniIvVmw

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 Types of Inventory

Supplier Manufacturer Distributor Retailer Customer

Raw Materials
(RM)
Work-in-Process Finished Goods
(WIP) (FGs)
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 Types of Inventory

Raw Materials Work-in-Process

(RM) Scrap
(WIP)

Finished Goods
(FGs) Maintenance, Repair
and Operating
Supplies (MRO) 12
 Types of Inventory

• Raw Materials
(RM) and
Components parts

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 Types of Inventory

• Work-in-Process
(WIP)

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 Types of Inventory

• Finished Goods
(FGs)

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 Types of Inventory
• Maintenance, Repair and Operating Supplies
(MRO)

• Nuts and bolts

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Types of Inventory
• Scrap

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Suppliers Manufacturers Distributors Retailers Customers
RM WIP FG
s

• How to maintain the quality of inventory?

• How to manage inventory properly?
• Responsibility of inventory
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 Roles of Inventory
• Balancing Supply • Buffering uncertainty
in demand or supply.
and Demand. • The company itself.
• The suppliers.
• The customer

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 Roles of Inventory
• Enabling economies • Enabling
of buying. geographic
specialisation.

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Vietnam – the new supply hub
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Inventory Management

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Inventory Management
• Wrong item • Wrong time

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 Inventory Management
• Ultimate objectives:
• Minimize all inventory • Meet other
costs. organizational goals.

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 Cost of Inventory
Product cost Carrying cost

Order and Set up

Stockout cost
cost

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Product cost • Money paid to suppliers
for products that are
purchased.

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Carrying cost

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• Carrying cost =
holding cost Carrying cost
• Several expenses
incurred due to the fact
that inventory is held.

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• However, it is much
more. Carrying cost
• Taxes.
• Insurance.
• Cost of materials
handling, tracking and
management.

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Carrying cost

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 Carrying cost
Scenario 1
• Annual carrying cost =
25%
• Total value of inventory =
$100 million
Þ Carrying cost = ?

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 Carrying cost
Scenario 1 Scenario 2
• Annual carrying cost = • Annual carrying cost =
25% 25%
• Total value of inventory = • Total value of inventory
$100 million reduce to $80 million
Þ Carrying cost = ? Þ Carrying cost = ?

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 Carrying cost
• Inventory value reduces
• $100 million -> $80 million
Þ Carrying cost = a saving of $5 million
Þ Profit = Price - Cost
Þ Increase Profit

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Ordering cost

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 Ordering cost
• Ordering cost = setup cost
• Ordering cost = expenses incurred in placing
and receiving orders from suppliers.
• Setup cost = inventory produced internally,
is an administrative expense.

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 Setup cost
Production
line

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Stock-out cost

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 Stock-out cost
• Stock-out cost = Shortage cost

Raw materials Finished goods

• Disruption of • Cost incurred when
material flows. inventory is not
available to meet
demand.
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Supply chain Disruption

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• Product cost: calculated by each
product
• Each box = $20
• 6 boxes = $120

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• Product cost: calculated by each
product
• Each box = $20
• 6 boxes = $120
• Carrying cost: calculated by each product
• Each box = $5
• 6 boxes = $30

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• Product cost: calculated by each
product
• Each box = $20
• 6 boxes = $120
• Carrying cost: calculated by each product
• Each box = $5
• 6 boxes = $30

• Ordering cost: calculated by each Order

• Each box = $10
• 6 boxes = $10

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• Product cost: calculated by each
product
• Each box = $20
• 6 boxes = $120
• Carrying cost: calculated by each product
• Each box = $5
• 6 boxes = $30

• Ordering cost: calculated by each Order

• Each box = $10
• 6 boxes = $10

• Stock-out cost: calculated by each

product
• Each box = $5
• 6 boxes = $30 46
CHECK ATTENDANCE

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BREAK-TIME

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 Day-to-day inventory decisions

1. How to control the system?

2. How much to order?

3. When (how often) to order?

Þ OBJECTIVE: minimise inventory-related

costs.
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Technique: ABC Analysis

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 Technique: ABC Analysis
• The ranking of all items of inventory according
to importance.
Þ Managers can focus on the most important
items.

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 How to determine ABC Analysis
1. Determine annual usage/sales for each item (units
and/or value).

2. Determine the percentage of the total usage/sales

by item.

3. Rank the items from highest to lowest percentage.

4. Calculate the cumulative percentage of total value.

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 ABC Analysis Exercise
• Please download the exercise file on Moodle.

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 A item
• High accurate forecast.

• Strict degree of control by senior level.

• Highly accurate inventory records.

• Frequent or continuous review.

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 B item
• Medium accurate forecast.

• Moderate degree of control by

middle level.

• A periodic review system can be

used. 57
 C item
• Approximately forecast.

• Control by junior level.

• Use infrequent periodic

review system.

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 C item
• Approximately forecast.

• Control by junior level.

Bin 1 Bin 2
• Use infrequent periodic
review system.
Two-bin system

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C item: two bin system

Warehouse

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C item: two bin system

Warehouse Factory

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C item: two bin system

Warehouse Factory

A signal
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C item: two bin system

Warehouse Factory

A signal
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 C item: two bin system

Supplier Warehouse Factory

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C item: two bin system

Warehouse

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Two Bin Supply System
at St Clair Hospital
• https://
www.youtube.com/
watch?
v=yjSwwPF5BUU&t=257s

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 Technique: ABC Analysis
• Ensures control
over the costly
items.
• Reduction in the
storage expenses.
• Resource
allocation.
• Increased economy. 67
THANK YOU!